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Warren Buffett says “Buy American”

The article in the NY Times, “Buy American, I Am” written by Warren Buffett is spreading like wild fire across the media.   With the markets in an extremely oversold state due to over inflated fears of recession, it’s comforting to see top investors like Warren Buffett, buying aggressively.

Even though I lived through the tech bubble, big declines in the market can still give me slight nausea.  Regardless though, they should be viewed as an opportunity for those with long investment time lines.

Here why Mr. Buffett is buying now:

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

Here are some reasons why Mr. Buffett thinks that this downturn is no different than the last:

Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

As a lot of you have sold your equities, you’re probably sitting on a lot of cash.  Here’s why Mr. Buffett thinks that cash is a bad idea:

Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.

Warren Buffett is the one of, if not, the greatest investor of all time.  He buys when the markets are fearful and when stocks get cheap.  He’s buying now, are you?

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FT About the author: FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.

{ 22 comments… add one }
  • Rob G October 21, 2008, 8:50 am

    I wish I wasn’t paying down some of my debts so aggressively. I’m pretty sure this down market will last about a year and I’ll catch hopefully six months of it.

  • FT FrugalTrader October 21, 2008, 9:09 am

    Rob, paying down debt is never a bad choice as it’s a guaranteed return. Who knows what’s going to happen to the markets in the short term.

  • Al October 21, 2008, 9:18 am

    Could it be that Warren Buffett is yet another market shill who is trying to inflate a bubble market that is full of holes?

  • Dan October 21, 2008, 9:40 am

    Warren Buffett is a genius. He has no reason to inflate the bubble as his market worth is still in the billions.

    He’s just following the universal law of buy low and sell high. Today may not be the lowest, but it is for sure not the highest we’ll see in the market.

    While many companies struggle at this time, there are still many (i.e American Express) that are posting surprising profits. Don’t count the market out for the long term. Doing so is a big mistake.

  • Miranda October 21, 2008, 9:50 am

    The thing I love about Warren Buffett is that so often his “genius” is just common sense. The real trick is staying calm and keeping in mind that, for the most part, the stock market (especially in a retirement account) should be a long-term investment.

  • Four Pillars October 21, 2008, 10:03 am

    I’d like to know how much he is buying. I believe he has a lot of cash so if he is only buying a small percentage then his words are somewhat meaningless.

  • David V October 21, 2008, 10:18 am

    FP: Last time I checked he had about 40 billion available (if you include his Berkshire holdings). He’s already spent 10 billion (5 to Goldman, 5 to GE), so there is 25% of his cash spent. I think his biggest issue is that he is spending so much money it’s hard to buy into any stock that he thinks is valued attractively.

    You and I can buy a thousand shares of petro canada and it won’t affect the stock price. It’s harder when you’re buying a hundred million shares. There are also a lot more issues with the securities and exchange commission with regards to become an insider.

    The article though refers to his personal holdings. It also states that if the economy continues as it currently is, he’ll own 100% of his portfolio in US equities. I don’t know how much his personal portfolio is, but going from 0% US equities to 100% US equities is a bold move.

    I read the article in it’s entirety. He’s not saying that the market will rebound in 6 months, he doesn’t say it will rebound in two years. He believes that historically, the market outperforms all other asset categories OVER TIME (not meaning to yell, but I can’t figure out how to underline).

    I think people are starting to realize that the world will not end, and that’s why we’re seeing the market increase. Is it over for the volatility? Probably not. Will you regret buying today in a year? Maybe. Will you regret buying today in ten years? Probably not.

    That said, as the mutual funds say past performance is no indication of future performance.

  • Victor October 21, 2008, 10:28 am

    I think one thing most people forget when reading (and giving) advice of this type is that people like Buffet have A LOT of money available. They are nowhere near being in danger of losing their jobs, their homes, or their retirements.

    In that situation, it may make sense it invest heavily in risky markets.

    However, most of us are not billionaires, nor even millionaires. Most of us have some sort of full-time job, and usually a collection of monthly dues (utility bills, mortgage, food, etc.). In risky market situations I think it’s crucial that we [normal people] not get overly greedy and remember the fundamentals.

    Before I’m accused, I’m not fear mongering. Remember the tech bubble? People were leveraging their entire home’s worth to buy shares without understanding what they were doing. Others involved in the tech bubble lost their jobs when people began to realize that most of the e-companies weren’t really going to turn a profit. While I’m not saying this situation is identical, the potential for everyday folks to get greedy is definitely there, and I don’t believe articles like Buffet’s should come without a cautionary note.

  • Dividend Growth Investor October 21, 2008, 10:33 am

    Actually Buffett is holding 99% of his net worth in Berkshire Hathaway stock. So he is pretty long already. You have two ways to profit from his advice – either buy Berkshire Hathaway B shares costing 4129 as of yesterdays close..
    or you could follow Berkshire Hathaway’s stock holdings
    http://www.thediv-net.com/2008/10/warren-buffetts-berkshire-hathaway.html

    Anyways, the wise thing for an investor to do is to keep dollar cost averaging into this bear market, Do not confuse the advise of Mr Buffett with him calling the bottom.. Noone knows when we will keep the bottom.. That’s why spread your purchases, keep your asset allocation and keep getting dividends :-)

  • Greg October 21, 2008, 11:31 am

    I’ve been gradually putting money back in the market on a weekly basis since late September. I’ve been cashing-out some MMMFs (I always keep a small amount of cash on-hand for buying opportunities such as these) — the last time I saw such a clear “buy” signal was in October 2001, when the TSX was just above 6,000. Today I don’t know where the bottom is (nobody does), but I do know that I’ll enjoy the rebound when (not “if”) it occurs.

    On this basis, I totally agree with Buffett — we’ve been through worst crises in the past, and we’ve always rebounded. At this time world economic indicators are moving in directions that will support an economic recovery, so folks who are willing to move against the herd will benefit in the long-run.

  • Scott October 21, 2008, 11:48 am

    RobG — FT is right, paying down debt is like a no-risk guaranteed 18+% return (if it’s credit card debt). Can you find the same offer in today’s (or any day’s) market, beaten down as it is? No.

    It’s just that, psychologically, it’s more uplifting to watch your investments increase rather than your debts decrease — even though both scenarios are adding value to your net worth. It’s great to OWN; it’s crappy to OWE.

  • Sam L October 21, 2008, 12:38 pm

    Now is the best time to buy!!!! Buy it if you can and when I’m saying if you can it means that you have prepared yourself for the opportunity and saved enough cash to throw it into market now. Remember the major thing about Buffet he does what make sense. So if you have cash in your saving account – it makes sense to invest. I you barely make ends meet – it doesn’t make much sense to me to go and spend even more.
    Now, about Buffet and his article I’m pretty sure he is aware of impact he has on the market when he states “Buy a piece of America”. I don’t think he has an interest in influencing market for very simple reason he is talking about long term investments and articles like this one may have short term effect only. I guarantee that no one even will remember about this article in a month.

  • David V October 21, 2008, 4:25 pm

    Victor,

    Buffet does say in his article many times that he can’t forecast the market in the short term. Buying now doesn’t seem to be greedy to me. You can argue that the markets will continue to decrease, but I don’t think anyone is suggesting that we’re at the top of the market.

    Jim Cramer, a man who does not have the reputation or elequence of Buffet has said if you need the money in five years, don’t invest. That’s reasonable advice.

    As for whether you are a millionaire or not, it’s true, but if you’re saving for retirement, and you’re not using that money for ten – twenty years, the way to become a millionaire is to use the compound interest principals and try to buy stocks when they are low and sell when they are high. Even if you only have $1000, Buffet (and I) would say you’re better off to put that in an index fund for the next ten years than you are to put it into the bank, under your mattress or real estate (but you can’t really put only $1000 in real estate, so that’s a bit of a bad example).

    If you have debts, pay those off first. Investing when you have high interest debts is silly, but I think otherwise investing for the long-term is a good thing.

  • David V October 21, 2008, 4:29 pm

    One last post, I remember reading a study about how most people invest looking in the rear view mirror. So when stocks were great for the last three years you invest more. When stocks were bad for the last year, you don’t invest. But, we know, in theory, it’s best to invest when things are bad, and get out when people expect nothing but good times.

    I like to consider myself a relatively experienced and learned investor. That said, it was HARD to buy when the market was dropping 5-10% a day. It’s just hard. I bought some and the stocks continued to drop, and I bought some pretty close to the bottom (we’re talking $200 per investment, it was all the cash I had at the time) but I knew the world wasn’t ending and I have a long term view to the market (not retiring for 25-35 years).

  • Jerry Hung October 21, 2008, 6:53 pm

    I am buying BRK shares (so sad I missed the $3500 window)
    now I don’t have to worry :P

  • MultifolDream$ October 22, 2008, 12:01 am

    At times like these you can never be wrong buying BRK.

  • Ed Rempel October 22, 2008, 12:32 am

    Hi everyone,

    Personally, I think anyone that would not want to invets today should never invest in the stock market. What does the perfect buying opportunity look like? I realize that may sound a little strong, but riding the ups and downs is the cost of making the higher returns of the stock market. Moves to minimize the downside with market timing almost always make things worse.

    This is only the 3rd 40%+ decline in the stock market of the last 70 years.If we are not past the bottom, there can’t be much downside when the market is made up of all these large profitable companies. Since the market always goes back to new highs and it would take about a 65% increase to get to the all-time high, that sounds like an amazing buying opportunity.

    I’ve heard that Warren Buffett’s personal investments have been 100% cash (other than his Berkshire stock) for years, but that he just invested all of it in the stock market.

    He apparently had $300 million in cash. Does anyone know how he accumulated that? Apparently, he has only ever paid himself $150,000/year and has never sold any Berkshire stock or paid any dividend. He gets some money from directors fees, but I don’t see how he could get $300 million from that. Anyone know?

    Ed

  • Average Joe October 22, 2008, 5:37 pm

    All this talk of buying emerging markets seems a bit screwy. I’m buying American, and the dollar is loving it.

  • Scott October 22, 2008, 9:42 pm

    Geez, Average Joe…um….I don’t even know where to start with that one.

    Buying American is NOT why the $US is increasing. Go read some stuff…or go buy more American…I don’t know, whatever makes you sleep at night.

  • Average Joe October 23, 2008, 12:52 pm

    You’re correct in that regard, Scott, the $US hasn’t been on a tear since July because I’ve been dipping my toe in the water as of late. I’ve never been much of a trendsetter, however, or that willing to catch a falling knife, either.

    Foreign debts, swaps, The Fed and decoupling have much more to do with the $US increase than Average Joe.

    Emerging markets will always fluctuate as different markets emerge. I do know however, that the dollar is increasing, for whatever reason you say, and you seem smart, so I would love to read your explanation, but I do not confuse cause with effect.

    Average Joe’s Recommended Reading: The Snowball, The Origin of Wealth and Freakonomics.

  • Pat October 27, 2008, 1:06 pm

    I would say he is biased toward his own country. :)

  • The Nemesis Enforcer March 1, 2009, 9:22 pm

    Seems that his idea of Buy American is a bit of a contradiction. In the very long term, 15-30 years out, yes probably a safe bet. However, buying now or within the next 18 months would be foolish. Warren stated in his most recent letter to shareholders that he goofed and jumped in too early(especially with COP at the peak of the oil bubble!). And his major purchases in GE and Goldman Sachs recently were not purchases of common shares. He bought PREFERRED shares with a negotiated guaranteed yield (10% I believe??) He got a better deal than the US Gov’t! So take Warren’s own advice with a grain of salt. You and I should not be buying American yet. Any companies that get paid in US dollars or rely on the US for a substantial portion of their income will see major suffering over the next couple of years. The US dollar is set to drop in value while interest rates are set to explode. Currently, unless you’re backed by the US Government, it’s virtually impossible to finance your business. Don’t hold cash right now. Pay down debt, lock in long term debt at the lowest possible rate for the longest possible time, and buy gold or shares in other stocks (commodities) where the fundamentals have not changed. The US economy has changed. US Banks are nationalized and many more industries are jumping on the bandwagon. Do your research please! Be careful and trust nothing right now (relating to US corporations).

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